NEW YORK (
) -- During a time of historically low interest rates, narrowing margins and increasing regulatory burdens, efficiency is the name of the game for many banks.
A bank's efficiency ratio is, essentially, the number of pennies of overhead expenses for each dollar of revenue.
Bank of America
-- saddled with very high mortgage loan servicing expenses as it works through the problem loans mainly inherited from the acquisition of Countrywide Financial in 2008 -- improving efficiency is a core strategy.
CFO Bruce Thompson in July touted the success of "Project New BAC," which is the company's multi-step initiative to trim noncore assets and cut expenses, saying that excluding "legacy assets and servicing," the company's "number of employees has come down from 253,000 to 233,000 or an 8% decline" from a year earlier, as of June 30.
Thomson said at a conference on Sept. 10 that after adjusting for goodwill impairment write-downs and annual bonuses paid during the first quarter, "our expenses were down about $3 billion in the second quarter from the prior-year period and down about over $1 billion on a quarter-over-quarter basis."
Wall Street Journal
reported in Wednesday that Bank of America was accelerating its job cuts, with 16,000 layoffs planned before the end of the year.
According to Thomson Reuters Bank Insight, Bank of America's second-quarter efficiency ratio was 77.26%, improving from 87.16% the previous quarter. For the 12-month period ended June 30, the company's efficiency ratio was 75.55%.
Banks aim to keep their efficiency ratios below 50%, while a ratio below under 40% is considered to be excellent. While a good efficiency ratio typically implies decent or better overall earnings performance, it of course isn't the whole story, as we have seen with
Hudson City Bancorp
, which on August 27 announced an agreement to
, for about $3.7 billion.
Hudson City for years had been among the industry's most efficient players. The Paramus, N.J., lender's efficiency ratio for the second quarter was 36.79%, climbing from 31.14% a year earlier. After two major balance sheet restructurings, after its long-tern leverage strategy of increasing wholesale borrowings and investing in securities backfired as interest rates declined, the company's second-quarter net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- was a very narrow 2.13%.
Using data supplied by Thomson Reuters Bank Insight, we have identified the five actively traded banks -- with average daily trading volume of at least 40,000 shares -- with the best efficiency ratios over the past 12 months, excluding Hudson City Bancorp. All five names have seen strong year-to-date returns, while three of the banks also showed significant returns during 2011, when the
KBW Bank Index
Here they are, by descending (improving) efficiency ratio:
5. New York Community Bancorp
New York Community Bancorp
( NYB) of Westbury, N.Y., closed at $13.81 Wednesday, returning 19% year-to-date, following a 30% decline during 2011.
The shares trade for 1.9 times their reported June 30 tangible book value of $7.14, and for 13 times the consensus 2013 Earnings estimate of $1.04 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $1.13.
The company's efficiency ratio during the 12-month period ended June 30 was 41.71%, according to Thomson Reuters Bank Insight.
New York Community has long been a dividend story, with the company paying out 25 cents a share for 34 consecutive quarters, for a dividend yield of 7.24%, as of Wednesday's close.
Over the years, analysts and investors have questioned the company's ability to continue paying the dividend at this level, since recent earnings have barely exceeded the payout, but investors have clearly grown more comfortable this year, with the company's long-term prospects.
New York Community reported second-quarter earnings of $131.2 million, or 30 cents a share, increasing from $118.3 million, or 27 cents a share, during the first quarter, and $119.5 million, or 27 cents a share, during the second quarter of 2011. The sequential earnings improvement mainly reflected an increase in mortgage banking income to $58.3 million during the second quarter, from $35.2 million the previous quarter.
The company's net interest margin (NIM) was 3.30%, expanding from 3.24% the previous quarter, but narrowing from 3.50% a year earlier. The sequential improvement in the margin reflected "a record level of prepayment penalty income," within the company's core portfolio of multifamily mortgage loans.
For the 12-month period ended June 30, New York Community Bancorp's operating return on average assets (ROA) was 1.16%, while its return on average equity (ROE) was 8.80%, according to Thomson Reuters Bank Insight.
KBW analyst Frederick Cannon rates New York Community Bancorp "Outperform," with a $13 price target that has already been exceeded. The analyst in July said he expected "that the core NIM will continue to decline but stronger mortgage banking should offset this impact." The analyst raised his 2012 EPS estimate by 11 cents to $1.14, while leaving his 2013 EPS estimate unchanged at $1.08.
Cannon said that "prepayment income and mortgage banking should allow NYB to cover the dividend for the next two quarters at a minimum," and that "barring any M&A transaction that the company may enter then we believe the dividend is safe."
Interestingly, KBW analyst Melissa Roberts said on Aug. 27 after the Hudson City/M&T Bank deal was announced that Hudson City's exit from the S&P 500 index "likely paves the way for a new financial addition to the
S&P 400 Index
member New York Community Bancorp standing out as a strong contender to replace HCBK. Roberts added that the addition of New York Community to the S&P 500 would force mutual funds tracking the index "to purchase 18.1M shares of NYB."
Bank of America Merrill Lynch analyst Kenneth Bruce take the opposite view on New York Community Bancorp's ability to maintain the dividend, rating the shares "Underperform," with a price objective of $11, and saying in July that "NYB, like other thrifts, will likely see more pain ahead from the extended low-rate environment," and that "given the hostile rate backdrop, NYB's elevated payout ratio also remains a concern, should mortgage banking income pull back."
Bruce estimates that New York Community Bancorp will earn $1.07 a share for all of 2012, followed by EPS of 83 cents in 2013.
Interested in more on New York Community Bancorp? See TheStreet Ratings' report card for this stock.
4. Washington Federal
of Seattle closed at $16.70 Wednesday, returning 21% year-to-date, following a 16% decline during 2011.
The shares trade for 1.1 times their reported June 30 tangible book value of $15.69, and for 13 times the consensus 2013 EPS estimate of $1.31. The consensus 2012 EPS estimate is $1.28.
Based on a quarterly payout of eight cents, the shares have a dividend yield of 1.92%.
The company's efficiency ratio for the 12-months ended June 30 was 38.40%.
Washington Federal had $13.5 billion in total assets as of June 30. The company on Aug. 20 announced a major balance sheet restructuring "intended to reduce the Company's interest rate risk and improve its future earnings potential." The company sold $2.4 billion in fixed-rate mortgage backed securities with an average yield of 3.22% for a pre-tax gain of $95 million, and also prepaid $876 million in long-term borrowings with a rate of 3.94%, for a pre-tax loss of $95 million.
The company also "purchased a mix of short and longer term assets totaling $1.7 billion with an anticipated weighted average yield of 1.85%, and restructured an additional $100 million of long term debt to lengthen maturity and reduce the weighted average rate from 4.04% to 3.33%," and said that "an ongoing review of the investment portfolio and long-term debt likely will result in additional transactions of a similar nature."
Washington Federal CEO Roy Whitehead said that "given current interest rate conditions, we decided it prudent to harvest most of the steadily diminishing gain in the securities portfolio and prepay high-cost debt," and added that the moves "are not expected to have a material effect on net earnings this quarter, and will limit potential margin compression from prepayments on securities and provide more financial flexibility in the future."
Washington Federal's net interest margin had narrowed to 3.05% during the fiscal third quarter ended June 30, from 3.29% the previous quarter, and 3.44% a year earlier. The company's overall performance performance improved, with fiscal third-quarter earnings of $35.2 million, or 33 cents a share, increasing from $34.1 million, or 32 cents a share, the previous quarter and $30.1 million, or 27 cents a share year earlier, with Whitehead saying in July that the higher net income was "attributed primarily to the material decline in expenses related to problem assets, which more than offset a decline in net interest income."
The company's ROA for the 12-month period ended June 30 was 0.98%, and its ROE was 6.97%.
Sterne Agee analyst Brett Rabatin has a neutral rating on Washington Federal, and said in August after the balance sheet restricting was announced that "We still believe the shares will trade in fairly close proximity to
tangible book value given a difficult revenue growth environment, but our view is more positive on WAFD post the announced partial de-leveraging of the balance sheet despite a similar EPS outlook.
Rabatin estimates that Washington Federal will earn $1.31 a share for all of 2012, followed by EPS of $1.34 in 2013.
"Besides a higher level of confidence on the forward NIM due to less concern over MBS pre-pays, the balance sheet is overall better positioned for low or rising interest rates," he said."
Interested in more on Washington Federal? See TheStreet Ratings' report card for this stock.
3. Oritani Financial
of the Township of Washington, N.J., closed at $14.79 Wednesday, returning 19% year-to-date, following an 8% return during 2011.
The shares trade for 1.3 times their reported June 30 book value of $11.30, and for 18.5 times the consensus 2013 EPS estimate of 80 cents. The consensus 2012 EPS estimate is 70 cents.
Based on a quarterly payout of 15 cents, the shares have a dividend yield of 3.38%.
The company's efficiency ratio for the 12-months ended June 30 was 37.78%.
For its fiscal fourth-quarter ended June 30, Oritani Financial reported net income of $8.3 million, or 20 cents a share, compared to $8.4 million, or 20 cents a share, the previous quarter, and $7.3 million, or 14 cents a share, a year earlier. The company's net interest margin expanded to 3.66% in the fiscal fourth quarter, from 3.58% the previous quarter, and 3.40% a year earlier.
According to Thomson Reuters Bank Insight, Oritani's ROA for the 12-month period ended June 30 was 1.21%, while the company's ROE was 5.95%.
During the 12 months ended June 30, the company repurchased 11,056,605 shares for a total cost of $143.6 million, and an average cost per share of $12.99. As of July 25 -- with no further repurchases since June -- the company was authorized under its current repurchase program to buy back an additional 1,904,476 shares.
Sterne Agee analyst Mike Shafir has a neutral rating on Oritani, and said in July that the company "continues to deliver solid results," with the most recent quarter "highlighted by net interest margin expansion and robust loan growth" and also said the company "is building a valuable New Jersey franchise while returning excess capital to shareholders."
The analyst's earnings estimate for 2012 and 2013 match the consensus.
Interested in more on Oritani Financial? See TheStreet Ratings' report card for this stock.
2. Signature Bank
of New York closed at $66.78 Wednesday, returning 11% year-to-date, following a 20% return during 2011.
The shares trade for 2.1 times their reported June 30 book value of $32.49, and for 16 times the consensus 2013 EPS estimate of $4.22. The consensus 2012 EPS estimate is $3.77.
The bank's efficiency ratio for the 12-months ended June 30 was37.07%.
Signature Bank reported second-quarter earnings of $45.3 million, or 96 cents a share, increasing from $42.4 million, or 90 cents a share, in the first quarter, and $36.6 million, or 87 cents a share, in the second quarter of 2011. The company has been growing very quickly, with total deposits increasing 19% year-over-year, to $13.0 billion as of June 30, while net loans and leases grew 32% year-over-year, to $7.9 billion.
The company's ROA for the 12-month period ended June 30 was 1.09%, while its ROE was 11.35%.
Sterne Agee analyst Peyton Greene rates Signature Bank a "Buy," with a $75 price target, and said on Tuesday that "we believe loan growth will be slightly stronger than previously expected in 3Q12E," and that "coupled with revenue growth of 12%-15% in 2013E-2014E," he expected consensus estimates to move closer to his 2013 EPS estimate of $4.40, and his 2014 consensus EPS estimate of $5.10.
Greene called Signature Bank "one of our top growth recommendations," and said that "the primary difference in our view versus consensus is that we are more optimistic regarding net interest income growth."
The analyst also noted that the bank's "management has been much more thoughtful in constructing an investment portfolio that would be subject to less prepayment risk from a refi wave."
Interested in more on Signature Bank? See TheStreet Ratings' report card for this stock.
1. Discover Financial Services
Discover Financial Services
closed at $38.51 Wednesday, returning 61% year-to-date, following a 31% return during 2011.
The shares trade for 2.4 times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2013 EPS estimate of $4.02. The consensus 2012 EPS estimate is $4.23.
Based on a quarterly payout of 10 cents, the shares have a dividend yield of 1.04%.
Discover has been the most efficient of actively traded U.S. banks, with an efficiency ratio of 36.54%, for the 12-month period ended May 31. The company's fiscal year ends on Nov. 30.
Reflecting its emphasis on credit card lending and payment services, as well as the company's low-cost on-line deposit gathering model, Discover's ROA for the 12-months ended June 30 was 3.30%, while its ROE was 33.30%.
Discover in August announced a deal with
unit PayPal, for PayPal's customers to be able to use the service to make purchases at the 7 million retail locations that currently accept Discover, beginning in the second quarter of 2013.
KBW analyst Sanjay Sakhrani rates Discover "Outperform," with a price target of $40, saying after the PayPal deal was announced that it was "clearly a big win for the network side" of Discover's business, "as it exemplifies the value-added services it can provide and the optionality of the company's business model." The analyst added that "while there are likely to be some costs associated with the roll-out, we think it should be manageable for the company," and estimated that "Discover could earn 10-20 bps of the transaction, which would be consistent with
Sakhrani estimates that for its fiscal 2012 ended Nov. 30, Discover will earn $4.21 a share, followed by EPS of $3.96 in fiscal 2013.
Interested in more on Discover Financial Services? See TheStreet Ratings' report card for this stock.
Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.